Blockchain: Turning experiments into mission-critical business applications
Over the past several months, we’ve been researching companies that are leveraging an emerging technology called blockchain, which is the ‘general ledger’ underlying the digital currency Bitcoin. The blockchain’s general ledger technology can enable institutions and individuals to record and transfer assets instantly without intermediaries— virtually eliminating fraud, and instantly verifying ownership of any asset at any moment in time.
The fundamental design of the blockchain virtually guarantees a secure network and guarantees the veracity of ownership of any asset through a decentralized system. Already proven at scale with Bitcoin, there is enormous potential beyond a pure digital currency that both startups and established companies have recognized.
We’ve never seen anything like this before…or have we?
We have heard many compare the blockchain of today to what the TCP/IP and DNS protocols were to the birth of the consumer Internet. The reason for this is that before those technologies there was no way to find and verify the digital address for any other computer in the world. Similarly, today there is no way to digitally verify the owner of any asset instantly. Legally you must find a signature on some obscure document somewhere to prove ownership. Think of your house or your car lease, or even a municipal bond—somewhere there is a piece of paper representing your ownership. No document equals no proof. There is no doubt about the growing groundswell in the mainstream corporate world that blockchain technology, and specifically the applications that can be built on top of it, has the ability to fundamentally shift how business transactions are handled.
If you think of Bitcoin (the first production application on top of the blockchain) as the evolutionary equivalent of email (the first application on top of TCP/IP & DNS), and consider the subsequent revolution in TCP/IP and DNS enabled communications that came after email (HTTP enabled web browsing, VOIP, Skype and WebEx), then you can expect there will be so much more yet to come beyond Bitcoin. Certainly, venture capitalists are rapidly becoming believers: Coindesk gathered data on blockchain vs. the early internet VC investment and found that in 2014, $362M had been invested in blockchain and blockchain/bitcoin hybrid startups, roughly the equivalent (inflation adjusted) to the $250M invested in the 1995 Internet era, and in fact year-to-date the pace of VC investment in blockchain technologies has nearly doubled.
What’s been happening?
The blockchain as a general ledger system for digital currency was actually conceptualized in a white-paper just a few weeks after Lehman Brothers collapsed in 2008, but it has really only been over the last two years that bitcoin has established itself as a “real” currency with transaction volume of any scale. Proof of the blockchain working at scale began to generate interest from established institutions in digital currency and enabling technologies. Goldman Sachs, Barclays, and BBVA were early investors. Chain.com, a blockchain infrastructure company, recently raised capital from Capital One, Visa, Citi Ventures and Nasdaq. Santander, Lloyds Bank, and BNP Paribas have published extensive reports on bitcoin or the block chain. This interest at the Fortune 100 level and the burgeoning startup and open source ecosystem are not only creating interesting social blends at conferences, but also enabling powerful experimentation sandboxes of future use cases for the blockchain.
International remittances, private share exchanges, syndicated loans, and U.S. Treasury Repos all have blockchain-based experiments in process with huge theoretical impact. But what turns experiments into mission-critical business applications?
One potentially great enabler we’re following closely here at Safeguard includes blockchain-enabled smart contracts, which could open an exponential explosion of potential use cases. Smart contracts are similar to a typical computer program’s if-then statements, except with real-world assets. If a condition is triggered, the smart contract executes the corresponding contractual clause. There are enormous benefits, including: minimal execution cost, ability to layer in complexity without incremental cost, and ability to execute a contract without sharing confidential information about the parties or transaction. For more on “smart contracts”, check out this blog from Anjney Midha at KPBC Edge Fund.
In addition, like all enterprise infrastructure technology, scalability and security of the blockchain will be of paramount importance as we move from the sandbox to production. The blockchain that today powers bitcoin has a limit of 7 transactions per second, and an average wait time for transaction approval that is measured in minutes, not seconds. This level of latency simply won’t work for many mission-critical use cases. Also, though theoretically secure, there will need to be proof of “hardening” before institutions fully leverage the blockchain for in-production transactions—that the infrastructure can withstand coordinated cyber-attacks, protect against money laundering schemes and that financial institutions can build a “last mile” to interconnect their legacy systems to the blockchain in a secure manner.
As entrepreneurs and financial insitutitions create such new solutions and applications, we believe that the ubiquitous use of blockchain technology might well be just around the corner, not just on the horizon. At Safeguard, we are looking for deal opportunities in this space—blockchain-based companies that have solved the issues of bringing the technology from the sandbox to production. Submit your Business Plan Today.
Here are some other articles and resources that discuss the short- and long-term potential for blockchain:
- BusinessInsider: “Santander is experimenting with bitcoin and close to investing in a blockchain startup”
- CoinDesk: “IBM Developing New Blockchain Smart Contract System”
- CoinDesk: “UBS Sheds New Light on Blockchain Experimentation”
- CoinTelegraph: “Citi Develops 3 Blockchains with Own ‘Citicoin’ Token”
- Financial News: “Nasdaq: Our plans with the blockchain”
- Reuters: “Nine of world’s biggest banks join to form blockchain partnership”
- TechCrunch: “The Blockchain Might Be The Next Disruptive Technology”
- VentureBeat: “The 2 biggest emerging opportunities in cryptocurrency”
- Wired: “Block Chain 2.0: The Renaissance of Money”
This post was written by David Luk